Unknown to most people, a qualified Section 529 tuition program (better known as 529 Plans) is a type of tax exempt organization. A Section 529 plan provides prepaid tuition or a method of an education savings program to provide pre-tax dollars for college tuition and other higher education expenses tax free.
In order to have a qualified Section 529 tuition program, the program must satisfy all of the below listed requirements:
- Have assets that are held in a qualified trust
- The program has received a determination letter from the IRS that it has satisfied all of its requirements
- A separate account for each beneficiary
- No contributor or beneficiary can direct or control the investment of the contributions
- An interest in the tuition program cannot serve as security for a loan
- There are adequate safeguards for excess contributions
- The program is used to pay for qualified educational expenses, such as tuition, fees, books, school supplies, and other equipment required for the enrollment or attendance at a qualified educational institution
- Beneficiaries must be designated at the beginning of participation in the program
- Must provide for refunds when a beneficiary dies or becomes disabled
- Must report annually to the IRS about its distributions to beneficiaries
Although these rules and requirements may seem complicated to the ordinary person, most states provide 529 plans for residents of that state to participate in. Be sure to check with your state in order to determine if your state provides a Section 529 plan.